Why does domicile matter in the UK?

Following on from our previous article 'A guide to the UK's domicile regime' Hannah Wailoo and Georgina Hamilton go on to explore why domicile matters and the key taxes impacted by the UK regime.

Whether an individual is liable to pay tax in the UK depends on a number of factors which includes the location of the assets as well as the residence and domicile of the individual. A person's domicile will affect how several UK taxes apply, and 'non-doms' are taxed differently to UK domiciled individuals, under what is loosely referred to as the 'non-dom regime'. The deemed domiciled provisions were introduced to limit the timeframe that non-doms who choose to live in the UK can benefit from the regime.

The key taxes that are impacted by the regime are:

1. Inheritance Tax 

If an individual is domiciled or 'deemed domiciled' in the UK, then all of their worldwide assets will be subject to UK inheritance tax on death. Conversely, non-doms are only subject to inheritance tax on assets in the UK, with their foreign assets being outside of the UK inheritance tax regime. 

Non doms are also able to transfer or give away foreign assets during their lifetime without being subject to inheritance tax whereas UK domiciled individuals are subject inheritance tax if they make transfers of foreign assets during their lifetime. The use of trusts outside of the UK is an area where there is a distinct difference between how a UK domiciled individual and a non dom would be subject to inheritance tax. For example, a 'non-dom' is able to create an 'excluded property trust' by settling non-UK assets in excess of their available nil rate band amount into trust, without the 20% entry charge, ongoing 10-year anniversary charges, and exit charges that would apply to a UK domiciliary who did the same. 

2. Income Tax and Capital Gains Tax 

A person's domicile also determines to what extent an individual is subject to Income Tax and Capital Gains Tax in the UK.  UK resident and domiciled individuals are subject UK tax on their worldwide income and gains for the tax year in which they arise (known as the 'arising basis'). Resident non doms are also subject to income tax and capital gains tax on worldwide income and gains on an arising basis unless they elect to be taxed on what is known as the 'remittance basis'. Broadly, this means that foreign income and gains are not subject to UK tax unless they are brought into the UK. The regime therefore grants non doms the opportunity to live in the UK without being liable to pay UK tax on their foreign assets  

The ability for any government to assert taxation rights over foreign assets is a complex regime and naturally, how the non-dom regime applies to an individual's circumstances can be a complex exercise. Some common misunderstandings include:

• The Remittance Basis automatically applies. In fact, it automatically applies only in very limited circumstances. Otherwise, an individual must make an election to HMRC in order to utilise it. HMRC will therefore need to be in agreement with the tax-payer's non-dom status for the regime to apply.
• The Remittance Basis is free. Non-doms who live in the UK on a long term basis must actually pay a charge to HMRC in order to benefit from the regime, known as the Remittance Basis Charge ('RBC'). The RBC does not apply in the first 7 years of residency. Thereafter the RBC is either £30,000 or £60,000 depending on the number of years of residency. 
• The Remittance Basis can apply indefinitely. The remittance basis of taxation is not available once an individual has become deemed domiciled in the UK.
• The Remittance Basis is non-reciprocal. The UK retains some taxing rights over individuals who become deemed domiciled but then leave the UK - an individual only loses their 'deemed domiciled' status once they have been non-UK resident for a specific number of years.

A person's domicile is also relevant in other legal contexts such as which legal system will apply to the succession of their estate.

What next?

During a House of Commons debate on 28 November 2022, The Financial Secretary to the UK Treasury, Victoria Atkins, commented: 'Labour says its plan will save £3 billion but, in the last year, non-doms paid nearly £8 billion in income tax, corporation tax, capital gains tax and national insurance' which warrants 'a careful and considered approach'.  However, it is not necessarily exclusively the Labour Party who may have the regime under review.  Jeremy Hunt told the House of Commons Treasury Committee on 23 November 2022 that 'we will continue to look at such schemes'.

Any significant changes to the non-dom regime may lead UK resident non-doms to reconsider their presence in the UK.

If you would like any advice in relation to your UK residence or domicile position or on the remittance basis of taxation or wider succession matters, please contact Hannah Wailoo, or your usual Withers contact.